His resignation comes amid flagging peace talks between Israel and the Palestinians, which by the end of this year were intended to lead towards an agreement on the formation of a Palestinian state.

Although Livni has led the negotiations on the Israeli side, the two sides remain divided over final borders, Jewish settlements in the West Bank, the future status of Jerusalem and the fate of about 4.6 million Palestinian refugees.

Complicating Livni's attempt to form a coalition, the ultra-Orthodox Shas party has said it will quit the government if the division of Jerusalem between Israel and the Palestinians is broached.

The Palestinians want mostly Arab east Jerusalem, which Israel seized in the 1967 Arab-Israeli war, as the capital of their future state.